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The Securities and Exchange Commission appears to be backing off from a proposal that would ban placement agents from marketing private equity funds to public pension fund clients.

Andrew Donohue, director of the division of investment management at the SEC, sent a letter on December 18 to Richard Ketchum, chief executive of the Financial Industry Regulatory Authority, asking if FINRA would be willing to implement rules banning pay-to-play activities by registered broker-dealers. If so, the SEC is willing to exempt such registered entities from its rules, the letter indicated.

"An exception to the ban for registered broker-dealers acting as legitimate placement agents might be feasible if FINRA is willing to implement rules that would prohibit pay to play activities by those persons," Donohue wrote.

He also wrote that the SEC's investment management division is in the process of formulating a recommendation to the Commission for a final rule.

Global Pensions magazine earlier reported news of the letter.

It's unclear how FINRA responded. Executives from the authority were not immediately available for comment.

The letter offers a gleam of hope for both the placement industry and many smaller private equity firms, which have argued that an outright ban would hurt smaller firms, who don't have full-time marketing staff in-house and thus rely heavily on placement agents. Instead, many in the industry have advocated heightened disclosure and stricter registration requirements.

Also last week, Christopher Dodd, chairman of the Senate Banking Committee and the author of the financial reform bill currently being reworked in the Senate, sent a letter to the SEC that called for strong regulation rather than a ban. "In some cases, the use of third-party placement agents may be the only cost-effective way for smaller funds to get the attention of public fund managers and thereby raise needed capital," Dodd wrote.

"After two to three months of silence from the SEC, there are sudden bits of positive news," said Kelly DePonte, a partner at placement agent Probitas Partners. "There are two things that occurred [recently] that are basically saying don't ban but have agents register as broker-dealers and have FINRA regulate them."

The proposed ban, which is part of a broader set of rules the SEC is putting in place governing political contributions and other activities that can lead to pay-to-play, drew widespread criticism when it was first released last year. The rule drew nearly 200 comment letters from small firms, placement agents and even some public pension funds, many of which oppose the ban.

Donohue acknowledged this response, writing, "We received numerous comments...advocating that placement agents can provide important services to investment advisers."

The SEC proposals came after revelations of a kickback scandal involving third-party marketers in connection with investments, including many private equity commitments, made by the New York State Common Retirement Fund.

You can read the letter at the following link: http://www.sec.gov/comments/s7-18-09/s71809-252.pdf

LBO Wire and Private Equity News are both owned by Dow Jones.

By Laura Kreutzer and Sabrina Willmer

Contact them on Laura.kreutzer@lbowire.com and sabrina.willmer@lbowire.com